Ottawa’s tax measure ‘moves the needle’ for B.C.’s LNG, but doubts persist

TORONTO — The federal government has sweetened the deal for would-be natural gas exporters with new tax measures, but the industry is still fretting about feasibility of West Coast projects amid a deteriorating LNG price environment.

Under the new rules announced by Prime Minister Stephen Harper Thursday, companies building new LNG export terminals will be able to deduct capital costs at a faster rate, allowing them to defer tax payments and recoup investment more quickly.

“Our intention all along was to put the finishing touches on what the government can do to provide certainty for investment and, ultimately the development of a couple of projects, and moving them across the starting line,” Greg Rickford, federal Minister of Natural Resources said in an interview in Toronto Friday.

Last year, the B.C. government revised its LNG tax rate proposal to 3.5% — half of what it had originally proposed — in a bid to secure at least three of the 19 LNG consortiums proposing projects on the West Coast to proceed with their developments.

AltaCorp. Capital’s estimates show that $1 billion spent on LNG equipment would translate into $30 million in tax savings.

While welcoming the decision, Michael Culbert, president of Pacific NorthWest LNG project said Friday these are not “tax breaks” and the industry would still be paying the same amount — just over a different time period.

David Keane, President of the BC LNG Alliance, which represents the interest of the industry, said Ottawa’s tax overture “moves the needle” that could result in at least one positive final investment decision this year. “But it’s also important to point out that in addition to the LNG tax in British Columbia, our industry is going to end up paying carbon taxes; they are also going to buy carbon offsets — which is something that does not occur in any other jurisdiction — and pay PST, GST, municipal taxes, payroll taxes, royalties and corporate income taxes.”

Despite the industry’s efforts to downplay the benefits, the tax measures do improve the feasibility of projects.

“Anything that brings forward more cash flow upfront is important particularly in this environment,” said Ron Loborec, partner, national energy and resources leader at Deloitte Canada. “Capital is getting more expensive in the wake of low oil prices, and these companies also have oil projects. They are rationing their capital and making decisions on projects that improve the cash flow upfront.”

While the industry has successfully secured a range of benefits from the B.C. and federal governments, there is still no certainty whether the West Coast greenfield industry will take off.

Pacific NorthWest LNG, a joint venture between Malaysia’s Petronas Bhd. and its Asian partners, deferred a final decision on the project last year and Mr. Culbert would not confirm a new timeline for a final decision.

“As we move towards a final investment decision what we are trying to do is nail down financial items and ultimately refine the economics, albeit at a very challenging time,” Mr. Culbert said, adding that the company is still waiting on various regulatory decisions.

Barry Munro, oil and gas leader at Ernst & Young says while the B.C. industry continues to face competitive challenges, the tax measure helps level the playing field against competing jurisdictions.

“The U.S. and Australia in particular both had more favourable accelerated cost recovery for tax purposes than did Canada,” Mr. Munro said. “And due to the capital-intensive nature of the LNG industry, this was a significant disadvantage in attracting investment to Canada compared with the United States and Australia.”

Royal Dutch Shell Plc.’s decision to cancel its Arrow project in Australia and Perth-based Woodside Petroleum Ltd.’s acquisition of Apache Corp.’s assets in one of B.C.’s major LNG proposals suggest the tide may be turning for the province.

“These are big companies that are saying they are moving capital away from Australia and moving it in favour of Canada,” Mr. Loborec said. “And they have done it right in the middle of a low oil price environment.”

Canadian Association of Petroleum Producers says the International Energy Agency’s forecast  underscores the heavy competition for LNG development “and notes the relatively high production cost of Canadian natural gas that’s needed to supply proposed LNG facilities.”

“This makes the federal government’s announcement all the more important for our industry and creates opportunities to access new markets for Canadian resources,” CAPP president and chief executive officer Tim McMillan said in a statement.

But the government’s tax incentives may be offset by weakening Asian liquefied natural gas prices.

“We expect most already-approved LNG projects, including those in Australia and the U.S., will go ahead, but others planned may not materialize,” Dmitry Marinchenko, associate director at Fitch Ratings said in a note.

Japan’s LNG import price averaged USD14.3 per million British thermal units (Btu), 15% lower compared to the same period last year. Fitch expects Japan’s LNG import price to fall below USD10 per mBtu, which is lower than break-even prices of most LNG plants.

The silver lining is that the commodity downturn could help cut labour and project costs as inflation subsides, Mr. Culbert said.

“The unknown for all of us is exactly how long the oil price is going to stay where it is and ultimately when it levels out  — and at what level, Mr. Culbert said. “We always believed that being a first mover in LNG would give us benefits in contracts and labours associated with that. I think the first mover advantage now is probably doubled up.”

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